Sorry Suzuki, but you got it wrong again

In the last 18 months, Osamu Suzuki, the chairman of Suzuki Motor Corporation that owns India’s largest car maker Maruti Suzuki India Ltd, has been a regular visitor to India. He makes it a point to attend almost all of company’s board meetings (around 6 every year), and is a routine visitor to the firm’s Annual General shareholder’s Meeting generally held in September.

Osamu Suzuki, the chairman of Suzuki Motor Corporation

It would appear normal for the owner of a company to make this many visits to its most important subsidiary but in Suzuki’s case it has not always been like that. Till 2009, he was more bothered about Suzuki’s growth in bigger markets like Japan and US and while he understood the importance of Maruti, it did not occupy a significant portion of his mindspace.

The change in attitude is attributed largely to Suzuki’s weakening command in global markets like Europe and US and the coming of age of India and with it Maruti as a new frontier for automobiles. As a result, Maruti not only became the Japanese firm’s most fledgling arm–superseding its own standing in Japan– but in the last 3-4 years, it has also became a veritable cash cow.

The sluggishness in the Indian automobile market in the last 2 years has taken some sheen off that story. That has made Suzuki anxious. Labour strikes at the company’s Manesar factories in 2011 followed by an violent repetition in 2012 has forced him to take matters into his own hands.

The decision to steal the Gujarat project, where Maruti was working on building a factory of the same size as Gurgaon and Manesar put together, and put it under its own fold in a 100% owned Suzuki subsidiary however, was uncalled for. The company was at pains on Tuesday to explain the financial benefits of it. The subsidiary–Suzuki Motor Gujarat Pvt Ltd–would come into force by April 2014 and come 2018 manufacture cars only for Maruti. The latter would not need to spend on building the factory whose cost would be Rs 3000 crore initially but at the same time it would not have any say on how the factory is being run.

Suzuki also said that the company would sell the cars without seeking a profit. In effect it would only charge for the production cost of the vehicles and a mark up over that to take care of future capacity expenditure needs. In an ideal situation, this would indeed benefit Maruti and with it, its shareholders. With a cash reserve of over Rs 7,500 crore, Maruti would be free to concentrate on strengthening its R&D facilities in India and it will have the wherewithal to get more aggressive on the marketing and distribution side of the business.

But there is widespread skepticism and rightly so, on whether Suzuki would actually commit to such large investments without seeking profits. Further, as a Maruti official pointed out to me, the Indian firm would not be in a position to cross question Suzuki should the cost at which it sells the cars to it seem irrational. The opaqueness of the deal is perhaps one reason why the stock markets reacted negatively and Maruti’s share price tanked 8% on Tuesday.

The bigger concern however is that Suzuki is trying to tighten its grip over Maruti. As a 56% shareholder, it is already the supreme master of the company’s fortunes. But Maruti accounts for 40% of Suzuki’s global revenues and is now critical to the Japanese firm on the world stage. The deteriorating labour situation at Manesar perhaps made O Suzuki nervous about Maruti’s management policies and he deemed it fit that the Gujarat factory be managed by him directly.

That seems to be a myopic view and one that will not yield dividends in the long term. There was a need to look at some of the company’s management decisions in the aftermath of the labour strikes of 2011-12. And there were a few officials who should have lost their jobs. Instead of weeding out the bad apple from the group, Suzuki has allowed the malaise to fester. Instead by taking over the production facilities it has also posed uncomfortable questions on how Maruti’s runs its factories. The fall out of this on the morale of the workers would surely not be positive.

Maruti has a legacy of being a public sector company that was privatised at the right time, for it to tackle competition. In India it is one of the finest examples of how government can aid business and at the same time let it go free from the red tape and bureaucracy that stifles companies. The lack of trust and confidence that festers between the Japanese and Indians at Maruti has in a subtle manner come out in the open now.

Forcing a public listed company in India to the whims and fancies of an unlisted Japanese firm owned by the parent company may disrupt what is a perfectly well oiled machine.

O Suzuki san, the need of the hour is to set the house in order at Maruti and not to clip its wings. Treat the company as the jewel in your crown that it really is and not as a colony to be enslaved and exploited.